What can Occidental Petroleum possibly do with all its cash?



Occidental Petroleum’s spending

Of the ~$6.1 billion Occidental Petroleum (OXY) received from its California assets spin-off, $4.95 is restricted to share repurchases, dividend payments, or debt retirement, according to the Internal Revenue Service (or IRS) mandates. After paying its fourth quarter dividend and purchasing shares, the balance remaining in this restricted cash pool was $4 billion.

Occidental received an additional $1.15 billion from California Resources. These proceeds aren’t restricted. The company’s cash balance, including restricted cash, was ~$7.8 billion.

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Given that the company plans to spend $5.8 billion on capex in 2015, its unrestricted cash might not cover its capital expenditures. However, Steve I. Chazen, president and CEO, said “Our capital run rate in the 1st quarter will be higher than the $5.8 billion level and will decline all year unless product prices improve… Although we will likely outspend our cash flow during 1H 2015, we expect that by year end our operating cash flow will cover our capital expenditures and dividend payments, assuming a recovery to a $60 / bbl oil price environment.”

From the restricted cash pool, it is possible that the company could direct a considerable amount of the proceeds towards share repurchases. Chazen commented, “We have approximately 71 million shares remaining under our current authorization. We will continue to repurchase shares, subject to the stock price and market conditions, and expect to ultimately repurchase the entire amount.”

However, the earnings call also announced that one of Occidental’s top priorities for its 2015 cash flow was annual dividend increases. Yet the company also said on the same call that maintenance capital expenditure is of utmost priority. This is an unusual sequence of priorities, as several oil and gas companies—including Chevron (CVX) and ConocoPhillips (COP)—have assigned their highest priorities to dividend payments. All these companies are components of the Energy Select Sector SPDR ETF (XLE) as well as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

In the following part of this series, we discuss Occidental’s 2015 capital spending outlook in further detail.


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